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Issue 8

Spring 2017

Investing Insights brought to you by the students of NYU Stern


Change is perhaps the only constant, and in the investment world, J. Daniel Plants
successful investors are often the first to anticipate and adapt to change. In Founder and CIO Voce
recent times, the investment world has seen massive tangible and
intangible changes and more change is predicted to come by professionals
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across the industry. In this issue of eVALUATION, our team has focused on
presenting to readers different views about such changes impacting the
investment ecosystem, including the impacts of the new U.S. Featured Article:
administrations policies, the new global political landscape on investing, Blu Putnam
and the continuous impact of technology on the industry such as through Chief Economist and
the rise of robo-advisors. Managing Director, CME
Since the result of US presidential elections, the S&P 500 has already Page 12
increased 12.5% (1). Looking ahead, the new U.S. administrations focus on
bolstering economic growth through lower coporate taxes, better Professor Paul Wachtel
regulation, and new international trade policies has been a matter of
Stern School of Business
heated debate among economists and the investment community.
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Internationaly, with high-profile national elections a common theme in
developed European markets including the United Kingdom and France,
the impact of policy changes from the new governments is also a matter of Roderick Wong
concern among global investors. Managing Partner, RTW
The eVALUATION team is proud to present to its readers the eighth edition Page 18
of the newsletter with the theme: Investment in a Changing World
featuring interviews and opinions from leading industry professionals. In Professor Vasant Dhar
addition, the newsletter presents two investment ideas from MBA students Editor-in-Chief
at NYU Stern and coverage of recent events held by Stern's Investment Big Data Journal
Management and Research Society in the Spring 2017 semester. We hope Page 21
that you enjoy this issue and the varied perspectives on forthcoming
changes. Finally, we would like to thank our interviewees for their time
Student Stock Pitches
and contributions, as this would not be possible without their valuable
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Happy Reading! SIMR Recent Events

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eV Editors - Devesh, Diana, Joe & Wei

1: Bloomberg
Spring 2017 eVALUATION Page 2

J. Daniel Plants
Founder & CIO of Voce Capital
Mr. Plants founded Voce Capital Management LLC, a value-oriented,
employee-owned investment advisor, in 2011. His two decades of
experience prior to Voce featured leadership roles from Wall Street to
Sand Hill Road, including executive positions in the mergers and
acquisitions groups at Goldman, Sachs & Co. and JPMorgan. His prior
career spans dozens of successful M&A transactions and more than $20
billion in public and private capital raising across a broad range of
industries and market capitalizations.

Mr. Plants is an expert on corporate governance, having begun his

career as a securities attorney at Sullivan & Cromwell and later having
led the corporate defense advisory business at JPMorgan. He has
implemented numerous shareholder rights plans and advised on both
sides of many unsolicited and related party transactions as both a banker and lawyer; he is also a regular panelist in
industry forums on investor activism. Mr. Plants is the Chairman of the Board of Cutera, Inc. (Nasdaq: CUTR) and is a
member of the Council of Institutional Investors and the National Association of Corporate Directors.

Mr. Plants began his career serving a one-year appointment as a law clerk to the Hon. Alex Kozinski, Chief Judge of
the United States Court of Appeals for the Ninth Circuit. Mr. Plants received a JD from the University of Michigan Law
School, magna cum laude, where he won the Campbell Moot Court competition and was a publishing editor of the
Michigan Law Review. He received a BA in economics from Baylor University, where he was elected Phi Beta Kappa;
he was the National College Debate Champion in 1989.

eVALUATION (eV): Tell us a little bit about where I was an M&A banker for several years
your personal background and career thus before holding a similar role at JP Morgan, all in
far, what sparked your interest in investing New York City. Later in my career I had the
early on? opportunity to round out my experience by
working as an advisor to small- and mid-
J. Daniel Plants (JDP): I have a somewhat less
capitalization companies.
traditional background than your typical
investment manager. I did not come from One of the patterns I observed was a company
another fund or the trading desk of a big bank. I making poor choices because the board or
spent almost 20 years on Wall Street as an management were not properly considering the
advisor to companies, mostly as an investment impact of their decisions on shareholder value.
banker and a brief tenure at the beginning of my Even worse, some insiders were deliberately
career as a lawyer Sullivan & Cromwell as a acting contrary to the best interest of
securities attorney in the mid-1990s.Shortly shareholders. Sometimes they didnt have the
thereafter was recruited by Goldman Sachs right incentives, they were conflicted or they
Spring 2017 eVALUATION Page 3

didnt have the proper alignment with and objectivity that I learned through debate has
shareholders and it led them to make decisions had a large influence on our strategy.
that destroyed value or missed opportunities to
The final thing I would allude to is that I majored
create value. That seemed to me like a large and
in Economics with an emphasis on behavioral
structural inefficiency that could potentially
finance and organizational decision-making. My
form the basis of a successful investment
studies sensitized me to how organizations
strategy for someone that could identify and
arrive at decisions and how incentives, and
remedy these situations.
individual and group biases, can impact the
There are a couple of other things about my outcome. Learning the motivations of key
background that also impact what we do at Voce. corporate individuals is essential to
I was deeply involved in competitive academic understanding the choices they make on behalf
debate throughout high school and college. As of shareholders. When we speak of corporate
you may know, Voce is Italian for voice, and governance issues it is typically the presence of
thats part of the reason we selected it as our structural flaws, such as a lack of alignment or
name. While debate certainly has an oral improper incentives, that directly lead to poor
presentation and public speaking component to corporate choices.
it, what many people dont appreciate is that its
eV: Tell us a bit about the background of your
heavily research driven. The type of
firm, Voce Capital, what propelled you to start
policymaking debate I engaged in examined
the fund and could we dive into the firms
complex questions of economic policy and
strategy and investment process?
foreign affairs, which are resolved through the
application of empirical, fact-based JDP: The inspiration for Voce stemmed from that
argumentation. The foundation of those experience I described earlier, in working with
persuasive speeches isnt rhetorical flourishes, companies as an advisor to evaluate
but the marshalling of evidence. That is quite opportunities to create value for shareholders. I
similar to investment research when it is had seen too many situations where my team had
performed correctly extensive inputs of data, done thoughtful work for clients and only to see
observation and the objective evaluation of them the client fail to act upon it, and I wanted to be in
following the conclusions wherever they lead. a position where I could try to persuade others to
Weve had many investments where our initial act but to do that as a principal rather than an
hunch turned out to be very different from our agent. Managing dedicated capital and being an
ultimate conclusion for example, a hypothesis owner of the company would allow us to become
that a company was a potential long investment more active and try to effectuate changes, even if
and it turned out to be a profitable short instead. the management didnt concur with our view.
Or thinking that public activism would be That was the driving force behind it it was a
required to unlock shareholder value, where desire to no longer be subject to the discretion or
further research convinced us management was the whims of the corporate insiders that I had
already on the right track so that we didnt need seen over the years not always make the best
to push them publicly. That process of inquiry
Spring 2017 eVALUATION Page 4

decisions in their capacity as representatives of far one goes in doing that and how public to be in
the companys owners. communicating can vary. But we never buy stock
and sit back with our fingers crossed just hoping
I should also point out though that we dont only
for the best. Were always going to be involved.
engage in public activism. I like to emphasize that
we are selectively activist, meaning its not eV: How do you influence a company outside
something we shy away from but rather is a of a public activist situation?
component of our overall investment strategy
JDP: It begins long before you purchase your first
that complements our returns and mitigates our
share. Its the preparation and research so that
risks. Public activism has yielded approximately
we can pose probing questions when we meet
half of our returns since inception; a larger
that allows us. to begin testing hypotheses and
number of investments, and the balance of
compiling a composite of the management teams
returns, have been comprised of traditional
value-oriented investing with no public activism.
Fortunately, weve been successful since One of the things we hear from management
inception with both styles of investing. Public teams is that some prospective investors will say,
activism, however, does generate all of our public in the initial meeting, I dont really know much
persona just by its nature proxy contests and about your company, tell me about what you do.
public letters garner a lot of media attention. I cant think of a more insulting way to begin the
relationship. If you have a chance to sit down
Having said that, we also really dont do anything
with the CEO or CFO of a company, spend the
that is strictly passive. Even when we are not
time upfront so that when you are together you
involved in public activism, we are extremely
can fully capitalize on the opportunity. You may
engaged and hands-on with our companies and
not be a shareholder yet but if youre well
that is a critical element of our approach. For me
prepared, have insightful questions and
thats probably 80% investment philosophy and
demonstrate real interest and enthusiasm for
just 20% personality. I generally dont stand
what the company is doing, it will go a long way
around waiting to see whats going to happen nor
in building rapport and trust. Most companies,
do I believe in luck. Even when were not doing
even if they make mistakes, are trying to do the
so publicly, we believe we can generate returns
right thing. They may be misguided, but most
by supporting our companies behind the scenes,
want to create value for themselves and their
sharing our analysis and research with them and
shareholders. If you are upfront about why you
catalyzing positive change from time to time. As
have asked to meet with them, and are willing to
an owner of the business, we have valuable
share what you like about their business, it will
insights about investor expectations, risk
smooth the transition to the parts of their story
preferences, management performance, M&A
that you dont understand or are interested in
opportunities and the like. If one is articulate and
learning more about. By setting the stage
credible in communicating those views, whether
correctly, most management teams will respond
its to management or to the board, it can
well even if you move on to some pretty
influence them positively and create value. How
challenging questions. Why do you have so
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much excess capital? Why are you investing so

heavily in this particular project? Or, why are
your R&D expenses half of those of your
competitors? How has your G&A been increasing
faster than revenues? Sometimes just asking the
right questions and framing them with
data/context can help a management team see
where they have an opportunity to do better.

eV: What is the reason youve focused on the

small to mid cap section of the market? Is that
where you see the most opportunity? Do you
see that changing in the future?

JDP: There are so many great opportunities in

the SMID market. We have companies in our
portfolio that span from $100 million in market
capitalization on the low end to over $5 billion on
Because there is less attention on this part of the
the high end. We are invested in companies
market, its more likely that disconnects between
across that spectrum, with the average market
shareholder interests and those of insiders can
capitalization of our companies right now at
manifest and persist for long periods of time.
approximately $1.5 billion.
Theres usually no watchdog, or anyone who has
In these types of companies there are lots of stood up and said, Wait a minute, why are you
trading inefficiencies, because their size and being paid so much for such poor performance?
daily liquidity limits the number of investors that Or, Why does your family effectively control the
can accumulate positions in them. As a result, board and the management of this company
there are not hundreds of investors actively when you only own 2% of the shares
researching them the way they are much larger outstanding? Why has there not been a new
companies. And because of that, usually theres a director appointed in over a decade? Why are
limited amount of sell-side research coverage, you spending 40% of your free cash flow on this
too. We also see managerial inefficiencies. Some pet project thats never made any money and has
SMID management teams are very, very good and no prospect of doing so? These are all real
probably should be running a much larger examples from our own experience, by the way,
company. Others, not so much. And lets face it - and I think that absence of oversight is what
Goldman Sachs is not visiting these smaller allowed them to persist until we came along.
companies on a weekly basis with its very best
Many investment managers that started by
ideas on how to improve shareholder value. Its
focusing on the SMID market have been forced
just not their focus, so these companies are not
out of it as the size of their assets has outgrown
receiving the same kind of external advice that a
the strategy. That dynamic creates a somewhat
Walmart or General Electric might be.
Spring 2017 eVALUATION Page 6

permanent opportunity in this part of the market something that blocks us from influencing
for managers who are disciplined in matching change. Dual class stock, the presence of a
their assets with their capacity. At this point, six dominant shareholder, impenetrable corporate
and a half years into this, weve met hundreds of organization, an unusual jurisdiction where
SMID companies. We maintain a watch list of shareholders rights are unclear or not respected
companies weve previously met, in some cases any of those are unappealing for us. Some
that weve owned before, we may have models investors have been occasionally successful in
built with specific price targets assigned, or using activism in certain other jurisdictions but I
weve identified catalysts or milestones that we would say that its been a mixed bag overall. The
are waiting to see before we can invest. We track legal regimes are different, but just as important
these companies daily, and certainly through if not more so the practices and customs are
earnings and other corporate events. We have a different including cultural norms and
series of triggers that bring them to our sensitivity about all kinds of things. When you
attention, such as price movements or other step outside of your own core culture, it naturally
changes, so that we can very quickly come back becomes harder to read people. Even when you
up to speed if the opportunity presents itself. The travel to places that are quite similar to the
net of all that is by our investing so much time United States, there are still lots of opportunities
and resources over the years in this part of the for gaffes. Take for example Canada or the United
market, we believe we have a durable Kingdom - its mostly the same language, these
competitive advantage. are countries which the United States enjoys
shared history and exceptionally good relations,
eV: Youve focused exclusively on the U.S.
yet even then it can be easy to misread situations
market historically why has this been your
or people. We feel most comfortable here
strategy? Is there so much opportunity in the
because we understand the rules, the
U.S. in general that has kept you focused
institutions, the people and the decision-making
pretty well, and I worry that our ability to do that
JDP: There are two components to the regional effectively might be diminished outside of the
piece for us. First, yes, the domestic opportunity United States.
is so large that we really havent seen the need to
eV: Can you comment on the trends you are
venture offshore. I never say never, but right now
seeing regarding the activist investing space
we see plenty of opportunity here in the U.S.
as a whole, as well as your own experiences in
Second, even though I said earlier that we are not activist investment situations in the past?
publicly activist in every investment, we do insist What are the current corporate governance
upon a viable path for us that if for whatever issues in the U.S. particularly with small and
reason things dont work out the way we mid-cap companies that you are working with
anticipate, we can become more directly that seem to crop up more frequently?
involved. What that means is that we exclude
JDP: There may have been a shift in the last year
companies on the front end even if they might
and a half where certain large institutional
otherwise be a good investment if we feel theres
Spring 2017 eVALUATION Page 7

investors appear to have become a bit more experience, relationships or skills to trade exotic
reluctant to support activists, although I would credit default swaps, or ferret out undiscovered
say that this is at the margin. Many of those large stocks in Kazakhstan or other remote parts of the
institutions speculated to now be anti-activist emerging world, I would say the same thing
have in fact supported Voce recently in proxy about activist investing. It requires training,
contests, so I think one must look at it on a case- temperament and the right investor base, among
by-case basis. More broadly, if we step back at bit, many other things, and I dont believe many have
the significant growth and prominence of activist or can do it well. Large institutions, in particular,
investing over the last ten years would have have potential business conflicts that are
never happened without the support of the inherent in their supermarket business models,
institutional investment community. An activist such as corporate 401(k) management, that may
typically owns at most 5% to 10% of a company. impede their ability to publicly criticize
Theyre not going to single-handedly dictate management. And a portfolio manager who is
events; they are only going to succeed with the responsible for 50 or 100 or more stocks may
backing of the broader investor community. The find it difficult to take on an activist campaign
continued success of activists influencing change that might consume 25% (or more) of her time
whether through settlement, at the ballot box for the next couple of years.
or just behind the scenes reflects the enduring
eV: Is there an example of an activist situation
support of institutional investors for
you can share where you were able to get
constructive change.
involved and that involvement helped to
We have seen more incidents of institutional generate substantial returns?
investment firms that wouldnt have historically
JDP: Theres a very recent example I can share
been considered activists, sending letters and
involving a great company called Air Methods
becoming a little more aggressive, in some cases
Corporation, which is the largest provider of
actually nominating directors and mounting
medical evacuation helicopter services in the
proxy contests. Perhaps they are thinking, Hey
United States. It generates approximately $1bn
we can do this too; we are a large long-term
revenue per year by operating more than four
investor, we dont need a hedge fund to show up
hundred medically-equipped helicopters all
to press for change, were quite capable of doing
across the United States; it also has a small air
this on our own. It will be interesting to see if
tourism business. Air Methods saves peoples
that attitude prevails when the market finally
lives transporting some 100,000 critically
does turn and its less easy to influence a stock
injured or ill patients per year from the scene of
just by sending a letter or negotiating for some
life-threatening accidents or between acute care
fairly cosmetic changes.
centers. We first invested in the company in
Furthermore, and I am admittedly biased, like September 2011 - not as an activist - because we
many endeavors on Wall Street this type of believed it was a unique business but that its
investing requires a specialized skillset in order complex business model was poorly understood.
to succeed. In the same way that few have the For several years it was a great investment for us,
Spring 2017 eVALUATION Page 8

and management was generally shareholder would have never invested back in 2011. We
friendly. We remained actively engaged, but we would have missed several years of premium
werent pushing them to do anything necessarily returns and likely never been in a position to lead
different. We never sent a public letter or leveled a successful campaign for the sale of the company
any kind of criticism; very far from it actually, as in 2017. We thus generated a significant internal
it was one of our best investments. rate of return over a multi-year period through
the flexibility that our strategy gives us. Its a
As you might imagine, a business like that has
great illustration of the optionality embedded in
many drivers that can be quite volatile, such as
an integrated passive-activist approach such as
weather, fuel and maintenance, and most
importantly the volume and mix (insurance
status) of its passengers. For a variety of reasons, eV: Shifting gears a bit and thinking about the
in recent years the companys results had grown macro top-down view, in your opinion what
increasingly unpredictable, and as a result it are some of the key impacts of Trumps
became a much more difficult stock for investors election win and what changes are you
to own, pressuring its valuation. It also became expecting to see from the administration that
very heavily shorted, with a short interest could be material to the markets as a whole
exceeding 30%. We began urging the company in as well as your investment process?
2015 to consider taking the company private to
JDP: The single biggest effect that Trump has had
remove it from the spotlight of quarterly
so far on the markets has been psychological.
reporting. Ultimately our private efforts werent
Having someone in the White House who is an
successful in persuading the board to explore
accomplished businessman cannot be
strategic alternatives, so we began sending
overstated. There are many of his bizarre
public letters, and in 2016 we nominated two
statements and actions with which one can take
directors. Several board-level changes occurred
issue, but its hard to dispute that hes largely a
and we settled with the company by placing one
business-friendly, markets-oriented individual.
director on its board. Unfortunately, things at the
Thats how he created his wealth and I believe
company didnt get better - they actually got
thats his fundamental bias. It appears from the
worse - so we commenced another proxy contest
people he has selected and most of the policies he
in 2017, this time nominating four additional
has advocated that the President believes that
directors. Prior to the meeting, the company
the key to growing our economy is through
agreed to be acquired by a private equity firm in
individual effort and prosperity, rather than
a $2.5 billion acquisition, which just closed last
governmental manipulation and redistribution.
He seems focused on doing that in a way that is
This is a great example of a long term holding not zero-sum where someone has to lose for
an almost six-year investment that began as a someone else to prosper but rather by focusing
passive investment and then morphed into a very on policies that grow the size of the pie for
intense activist one as the situation evolved. If we everyone and by reducing, rather than constantly
had been like some activist-only firms, we enlarging, the role of government in the economy
Spring 2017 eVALUATION Page 9

and our daily lives. I think under the prior argue that will change peoples behavior in the
administration, there was a strong sense that short term.
that wasnt the case. Businesses now no longer
The sea change in regulatory philosophy is also
feel that they have a target on their back, that
very important. Although its hard to quantify, its
their own government is trying to demonize
nonetheless tangible. Take for example the FCC.
them or trying to render their success a liability.
We have several investments in companies that
We certainly hear that from most of our
sell technology to the large telcos and cable
companies, and I believe thats why weve seen a
companies that the FCC oversees. Many of the
generally supportive market since the election.
proposals pursued by the FCC during the prior
Beyond psychology, the policy initiative that administration, like regulating set top boxes,
Trump has proposed that would have the most were very poorly conceived and are now,
immediate impact on the economy, and therefore thankfully, dead. Likewise net neutrality,
the markets, is cutting tax rates. Thats the one although it will take a bit longer to reverse it.

The single biggest effect that Trump has had so far on the markets has been
psychological. Having someone in the White House who is an accomplished
businessman cannot be overstated. There are many of his bizarre statements and
actions with which one can take issue, but its hard to dispute that hes largely a
business-friendly, markets-oriented individual. Thats how he created his wealth
and I believe thats his fundamental bias. It appears from the people he has selected
and most of the policies he has advocated that the President believes that the key to
growing our economy is through individual effort and prosperity, rather than
governmental manipulation and redistribution.

issue that both Main Street and Wall Street agree Clipping the wings of the FCC will be terrific for
on. We have the third highest corporate tax rate consumers and for the technology companies
in the world and reducing corporate tax rates that serve them.
now would unleash all sorts of capital activity
At the SEC, we now have a corporate dealmaker,
and investment. Slashing individual tax rates,
rather than a litigator, at the helm. This is not
reducing the number of brackets, eliminating the
merely symbolism; it signals a clear shift in
surcharge on capital gains these are things that
priorities. Likewise, we expect a much more
would have an immediate impact and would
accommodative antitrust approach under the
affect peoples behavior in a very constructive
new administration. Most SMID companies
way. Some of the other things that have been
eventually get bought. Thats the way of the
talked about, such as eliminating the estate tax, I
world, and theres nothing wrong with that.
would support as well but I dont think you could
Entrepreneurial companies are formed, they
Spring 2017 eVALUATION Page 10

innovate, they grow and then they are increasing flows toward passively managed
consolidated into a larger enterprise. Thats a products?
healthy cycle and anything that makes that easier
JDP: When one considers the implications of the
to do ultimately is supportive of a portfolio of
explosion of passive products it is important to
SMID equities like ours.
ask why it happened in the first place. If the
International trade is one area where we have investment community is being honest with
sounded a cautionary tone. The Presidents itself, it should admit that a big part of that
protectionist instincts on trade are well-known reason has been that most active managers dont
and are concerning to me. Instigating a trade war create value for their investors, and there are
with China, Mexico or Canada is not smart. Our many reasons for that. When you layer on high
hope is that a lot of these early kerfuffles end up fees and expenses it makes the hurdle even
being confined to rhetoric or remaining as harder to deliver real alpha. Fortunately, Voce
isolated cases rather than mushrooming into full doesnt fall in this category - weve created
scale trade disputes with our large trading substantial amounts of alpha for our investors,
partners. So far, weve seen a certain amount of but for those managers that havent, it makes it
pragmatism out of the administration that hard for them to justify the fees of the actively
suggests that getting cooperation on geopolitical managed product. Thats driven investors en
security issues is more important to it than masse into passive low-cost vehicles because
beating allies up over trade disputes. I hope that they look like better bets, particularly in a market
realism continues because trade wars arent in thats been primarily going up for quite some
anyones best interest. time.

Remember that our portfolio of SMID companies The growth of these passive products has also
is heavily U.S. focused. Only about a quarter of been amplified because most of them buy stocks
our portfolio is exposed to non-U.S. revenues. on a market cap weighted basis, so they invest
Tax cuts for American consumers and businesses more into companies that are going up in value.
are great for our companies. Lower energy and As they take on increasingly large sums of capital
commodity prices are too. A lighter regulatory they must deploy it into the same companies,
touch whether it is the FCC, SEC, or the DOE is a thereby causing the values of the companies to
boon for the economy, for our companies and for rise even further. The vehicles then buy even
the markets. Thats why, politics aside, we feel more of these companies just to keep up and the
that on balance the likely effects of the Trump more of them they buy the more they go up in
administration on our portfolio should be very value, likely attracting still more capital for them
positive. to deploy - so theres a self-reinforcing feedback
loop. This part of the market has become so large
eV: What are your thoughts on the future of
that anyone who thinks passive vehicles are
the investment management industry,
not impacting equity values is kidding
particularly as actively managed products
themselves. ETFs and their ilk may be passive
have struggled in recent years with
investors in the sense that theyre not making a
Spring 2017 eVALUATION Page 11

call on the underlying fundamentals, but they are strategy, asset class and investment style that
not passive in the sense of not disturbing the best suits you. And dont forget to think long and
markets. This works on the way up, but what hard about the platform on which you do it, too.
people will see is that same dynamic on the way The firm, its culture, people, and incentive
down, with likely much higher velocity. As these system are hugely important to investment
vehicles sell stocks to fund investor redemptions, success and professional satisfaction as well. I
they will bring down the value of the equities that think people overlook the impact the last factor
they are invested in, which means they will have can have on their investment success, an thats a
to sell even more. That exact same feedback loop mistake.
thats powered them to dizzying heights will
I didnt get into the investment management
rapidly unwind and I think that thats a great risk
business to get rich, nor did I do it to manage a
and potentially a systemic one.
large organization or run a multi-strategy firm
eV: What advice would you have to offer to the making exotic investments or trading esoteric
NYU community, whether they are interested asset classes. I was attracted to a niche
in sharpening their investment acumen for investment style that allowed me to leverage my
their own portfolios or to pursue careers in experience spent advising companies and their
the industry? leaders on how to create shareholder value, and
to capitalize on my ability to detect and rectify
JDP: The single most important piece of advice I
defects in decision-making, alignment, and
would share with anyone considering a
incentives. For me, thats the area where we
professional investing career is to be brutally
uniquely excel and weve been successful
honest with yourself about what you are good at
because weve resisted branching into other
and what you are not good at. Even in their mid-
areas that dont leverage that core. Thats my
20s, a self-aware individual should already have
ultimate advice to aspiring professional
a reasonably well-developed understanding of
investors: make sure youre very clear with
his or her strengths and weaknesses. One of the
yourself about your motivations for pursuing
many reasons active managers dont add value is
this path, and understand clearly where your
because there are a lot of people trying to do
competitive differentiation is. Then put all your
things that theyre simply not very good at doing.
energy into sharpening that differentiation while
You must be candid with yourself about why you
being vigilant about being pulled into other areas
are in investing, what your motivations are, and
that dull your edge or dilute your focus.
what your skills are so that you can select the
Spring 2017 eVALUATION Page 12

Bluford (Blu) H. Putnam, Ph.D.

Chief Economist and Managing Director,
Strategic Intelligence & Analytics, CME Group
Blu Putnam is the Chief Economist and Managing Director of the Strategic
Intelligence & Analytics team at CME Group, the operator of futures and
options exchanges, including the Chicago Mercantile Exchange, the Chicago
Board of Trade, the New York Mercantile Exchange, and COMEX. He is
responsible for leading economic analysis on global financial, commodity,
and agricultural markets, analyzing client and competitor activity, and
managing a team of data scientists. He also serves as CME Group's
spokesperson on global economic conditions and manages external research

Blus career has ranged from central banking to investment research to

portfolio management. Blu regularly publishes research reports on the global
economy and markets, as well as providing video content for CMEs Futures
Institute web site. Blu earned his Ph.D. in economics from Tulane University
in New Orleans. He has five books on international finance and portfolio management to his credit as well as many
academic articles, in such journals as The American Economic Review, the Journal of Finance, American Statistical
Association, and the Journal of Applied Corporate Finance, among others.

All examples in this report are hypothetical which stands close to $20 trillion in an economy
interpretations of situations and are used for of about $19 trillion nominal GDP. The impact of
explanation purposes only. The views in this report tax cut without offsets on the national debt
reflect solely those of the author and not necessarily depends on the question of how much tax cuts
those of CME Group or its affiliated institutions. This
are able to actually stimulate economic growth.
report and the information herein should not be
This is a very hotly debated question.
considered investment advice or the results of actual
market experience. Lets start with corporate tax cuts. The first four
US tax policy is entering a highly uncertain phase, things a company might do with extra cash from
as over the summer of 2017 the Republican a corporate tax cut are (1) buy back the
controlled White House, Senate, and House of companys stock, (2) pay down the companys
Representatives will strive to reach debt, (3) raise the companys dividend, or (4) buy
compromises among their very different another company (M&A). None of these actions
factions. The key divisive issue for tax reform are likely to increase GDP, even if they may
among Republicans is whether to just cut taxes bolster shareholder value. Only if companies use
or whether to also find alternative sources of the extra money to invest in new plant and
revenue or expenditure cuts to make fiscal policy
revenue neutral. At stake is the national debt,
Spring 2017 eVALUATION Page 13

is much more concerning. At 105% national debt

The bottom line is that unless tax cuts to GDP, a big further rise in the national debt is
are accompanied with alternative likely to make the economy much more sensitive
ways of raising revenue or to interest rates, since higher rates mean higher
expenditure cuts, the national debt is debt service payments. And, a more fragile
headed much higher. This is what economy would potentially lead to the Federal
Reserve being more cautious on raising rates,
happened in the 1980s when President
which in turn could lead to a weaker US dollar. It
Reagan cut taxes. The national debt will be an interesting second half of 2017 to see
went from 30% of GDP to 50% over the how these debates are settled. In the meantime,
decade. The starting point this time uncertainties over US fiscal policy will probably
around is much more concerning. cause some delays in corporate spending, and
delay any material improvement in the economy.
equipment or R&D is it likely that real GDP
consumption channel, then a tax cut tilted
growth would be positively impacted. Our
heavily toward the wealthy will not do much for
conclusion is that the impact of corporate tax
future economic growth.
cuts on the stock market is very powerful and the
impact on the economy is very small. The s that unless tax cuts are accompanied with
alternative ways of raising revenue or
Now think about personal tax cuts. Individuals
expenditure cuts, the national debt is headed
with extra cash typically save (or invest) some of
much higher. This is what happened in the 1980s
it, and they also use some to reduce debt, such as
when President Reagan cut taxes. The national
paying down credit cards, student loans, car
debt went from 30% of GDP to 50% over the
loans, or home mortgages. The percentage of the
decade. The time around is much more
new cash going to consumption is typically larger
concerning. At 105% national debt to GDP, a big
for lower income individuals and much smaller
further rise in the national debt is likely to make
for wealthier individuals. This means that if the
the economy much more sensitive to interest
growth impact comes through the consumption
rates, since higher rates mean higher debt
channel, then a tax cut tilted heavily toward the
service payments. And, a more fragile economy
wealthy will not do much for future economic
would potentially lead to the Federal Reserve
being more cautious on raising rates, which in
The bottom line is that unless tax cuts are turn could lead to a weaker US dollar. It will be
accompanied with alternative ways of raising an interesting second half of 2017 to see how
revenue or expenditure cuts, the national debt is these debates are settled. In the meantime,
headed much higher. This is what happened in uncertainties over US fiscal policy will probably
the 1980s when President Reagan cut taxes. The cause some delays in corporate spending, and
national debt went from 30% of GDP to 50% over delay a
the decade. The starting point this time around
ny material improvement in the economy.
Spring 2017 eVALUATION Page 14

Professor Paul Wachtel

New York University Stern School of Business
Paul Wachtel is a Professor of Economics and the Academic
Director of the B.S. in Business and Political Economy Program, at
New York University Stern School of Business. He teaches courses
in monetary policy, banking and central banking, and global

Professor Wachtel has been with NYU Stern since 1972. He has
served as the chairperson of the Economics Department and as
Vice Dean for Program Development at Stern and was also the
chairperson of the University Faculty Council.

His primary areas of research include monetary policy, central

banking, and financial sector reform in economies in transition.
He is the author of several books, including Banking in Transition
Economies: Developing Market Oriented Banking Sectors in
Europe (Edward Elgar, 1998). His writing has been published in
numerous journals, including, most recently, Economic Inquiry, Journal of Banking and Finance, Comparative
Economic Studies and Journal of Money Credit and Banking. He is the co-editor of Comparative Economic Studies and
the program chair for the Dubrovnik Economic Conferences. He has been a research associate at the National Bureau
of Economic Research, a senior economic advisor to the East West Institute, and a consultant to the Bank of Israel, the
IMF and the World Bank.

Professor Wachtel received his bachelor of arts from Queens College, his master of arts in economics from the
University of Rochester, and his doctor of philosophy from the University of Rochester.

eVALUATION (eV): From politicians and the have savings, so we bring the goods in from
media, we often hear concerns about the US abroad. Theres nothing wrong with having a
trade deficit and how countries such as trade deficit or a trade surplus. Some countries
Mexico and China are taking advantage of the have one; some countries have the other.
United States. Do you think that the US trade
deficit should be a significant concern for the The fact that the United States has a trade deficit
American people or investors? is a reflection of the fact that we dont save as
much as other countries and, importantly, the
Paul Wachtel (PW): No. Its about as simple as fact that the rest of the world likes to invest here.
all that. The trade deficit is the difference Whether its buying fancy apartments on Park
between national savings and national Avenue, buying cattle farms in West Texas, or
investment. We have more investment than we buying shares in American corporations, the
Spring 2017 eVALUATION Page 15

United States is the safest place to invest in the the comparative advantage, and trade is to the
world. The returns are not all that bad, and the benefit of everyone involved. For example,
risks are minimal; the whole world is eager to manufacturing used occur in this neighborhood
invest in the US. That is, the world gives us goods around NYU. The loft buildings on Broadway
and services (our trade deficit) for the privilege near Tisch School of the Arts were clothing
of making investments in the US (obtaining US factories up until 50 years ago. Its not desirable
assets). to bring manufacturing back to this area. In the
very same way, you shouldnt try to bring steel
eV: To combat the trade deficit and help making back to Pittsburgh or manufacturing of
American manufacturers, politicians are other products back to certain towns. Changes in
considering imposing tariffs, implementing a technology have driven these industries
border adjustment tax, or revising or pulling elsewhere and changed the way things are
out of trade partnerships. In your view, how manufactured. Trying to remake the world of 50
would these policies affect the US economy? years ago might be romantic but it will also make
us all poorer.
PW: Youd be hard pressed to find an economist
who doesnt like trade. Even the anti-trade
economist that the Trump administration
drummed up claim to be interested in the
benefits of trade. Whether its trading between
you and me, trading between two industries, or
trading between two countries, there are
enormous benefits from trade. The increase in
trade that weve experienced over the last forty
years has benefited the American economy,
made the American consumer better off and
improved the global economy. By putting up
tariffs or any other barrier to prevent or
discourage goods from coming into the economy,
were reducing trade and letting some of the
benefits go down the drain. Trade barriers
reduce the variety of goods and increase the cost It is politically attractive for a candidate to
of goods. promise changes to people who feel theyve been
hurt, but the political or romantic notion that
Theres this romantic notion that youre going to youre going to remake certain places in the
remake the America of fifty years ago. Youre not country is just wrong. Youre not going to remake
going to do that. Manufacturing that was largely the American landscape. For over 100 years, the
domestic fifty or a hundred years ago hasnow strength in the American economy has been its
globalized for most industries. Manufacturing ability to change, remake itself, and take
goes to wherever its cheapest or to whoever has
Spring 2017 eVALUATION Page 16

advantage of changes in productivity and growth of real GDP is not substantiated by facts.
changes in technology. We shouldnt want that At best it is wishful thinking, at worst it is
to change. dishonest politics.

eV: With the current level of the US Much larger deficits do have some negative
government's budget deficit and debt, should impacts. It would lead to higher interest rates,
we be concerned about a decrease in particularly higher long-term interest rates, as
government revenue from proposed tax the Federal government borrowing places
reductions? demands on capital markets. That could
discourage private sector investment.
PW: The budget deficit at the current point of Interestingly, it could also attract foreign
time is not alarmingly large. Current debt levels purchasers of bonds which would lead to an
as a consequence of the financial crisis are higher appreciation of the dollar which, surely to the
than theyve been historically, but the question of Trump administrations chagrin, would increase
how much debt is too much debt is a very difficult the trade deficit. Would it push the American
one to answer. Some countries could experience economy to the point where the debt level is
a sovereign debt crisis with debt levels which are threatening the worlds confidence in the
lower than they are in the United States today. American economy? Maybe, maybe not.
Other countries experience no debt crises with

For over 100 years, the strength in the American economy has been its ability to
change, remake itself, and take advantage of changes in productivity and changes
in technology. We shouldnt want that to change.

debt levels which are much higher. Crises emerge eV: As interest rates rise, borrowing will be
when theres a lack of confidence in the ability of more expensive for the government. Do you
an economy to service its debt and maintain see that as significantly impacting the deficit?
adequate fiscal discipline. Thats hard to predict,
but I dont think current levels of the deficit or PW: It has a significant impact on the deficit. The
debt in the US are troublesome. government will be paying a lot more in
interest. Higher interest rates could discourage
The rough outlines of a tax reduction which were private sector investment. Would it completely
released by the Trump administration on April erode confidence in the American economy by
26th would increase the level of the deficit global investors? Hopefully not.
substantially. Ill be perfectly willing to tell you
that the tax reductions could have some positive eV: With the Federal Reserve having raised
benefits on entrepreneurship and investment, the federal funds target rate to 0.75-1% in
but the idea that they will completely pay for March, some investors are concerned about a
themselves by virtually doubling the rate of less accommodative environment while
Spring 2017 eVALUATION Page 17

others view it as much needed and long Our current expansion is getting long in the
overdue. Whats your take on the economys tooth; its been over 7 years since the crisis. Just
ability to weather these and future rate because an expansion has been going on for a
hikes? long time doesnt mean theres going to be a
recession, but its worth keeping an eye on
PW: I call it, and other people use this same term, things. When interest rates were at zero the Fed
normalization of short-term interest rates. You didnt have the room to maneuver, so
could make a very strong argument for why the normalization was the right step to take.
federal funds target has been kept low for as long
as it has been. Short term real interest rates have eV: Theres been a slight uptick in inflation
been negative since the crisis. At some point, recently, and its currently near the Federal
short term interest rates should reflect the Reserves 2% target rate. How would adding
underlying risk-free rate of return in the fiscal stimulus affect inflation in the future?
economy. The Fed is taking the correct action
with a gradual normalization that will brings the PW: The large tax reductions planned by the
short-term real interest rates into positive Trump administration could lead to some short-
territory. term expansion of the economy, and were
already dealing with an economy where
The Fed has begun the process of normalizing in unemployment rates are quite low by historical
a way that is not disruptive. They have been very standards. One could argue that we would create
gradual and have announced their intentions. inflationary pressures. Fortunately, low inflation
Theyve made it clear that theyre sensitive to expectations appear to be firmly rooted in the
whether theres any weakness in the economy. economy which gives us some resilience. But if
Theyre on the correct track, and I think that the inflation pressures seem to poke up, the Fed
process will go on for the next year or two. If the might decide to quicken the pace of
economy shows some weakness, as the Fed itself normalization in order to offset those
has said, they can reverse themselves or slow the inflationary pressures. The path of monetary
process down. policy would be sensitive to what happens with
fiscal policy. What happens to fiscal policy is still
One reason to get short-term interest rates above a bit of a mystery because a lot will happen to the
zero is to give the Fed room to work if there is a one page release from the treasury department
recession. If you have short-term interest rates before it turns into legislation.
which are 2 or 3% and a recession shock hits, you
can bring interest rates down to offset the shock. Thank you, for your time and insights!
Spring 2017 eVALUATION Page 18

Roderick Wong, MD
Managing Partner, RTW Investments

Rod Wong founded and serves as Managing Partner of RTW Investments.

Rod has over a decade of experience as a life sciences fund manager. Prior
to RTW, he served as a Managing Director and the Portfolio Manager for
the Davidson Kempner Healthcare Funds from inception.

Rod started his career in investment research, first as a Biotechnology

Research Associate at Cowen & Company and then as a Healthcare Analyst
at Sigma Capital. He graduated from the University of Pennsylvania
Medical School, received an MBA from Harvard Business School, and
graduated Phi Beta Kappa with a BS in Economics from Duke University.

Rod regularly serves on a variety of corporate boards, and has a keen

interest in educating the next generation of life science entrepreneurs. He serves as an Adjunct Associate Professor of
Finance at NYU Stern, and as an Advisor to the University of Pennsylvania Medical Schools HealthX program.

eVALUATION (eV): Could you provide an

overview of your background and career in eV: Could you share with our readers a
the investment management industry? What description of your firm, RTW Investments,
inspired you to transition from medicine to and the firms investment strategy and
investment management? process?

Roderick Wong (RW): I jumped straight into RW: We have a very simple mission, to identify
biotech research after I finished graduate school innovations that are going to make a big
because I loved the science. During medical difference to patients. The firm is built around
school I realized I got most excited learning this idea, from our team to our clients, to allow
about new drugs and technology. Investment us the time to do deep research and be patient
research was one of the jobs that gave me the with our investments.
opportunity to do that full time. I started out in
junior research roles and then eventually ended eV: What are the challenges of investing in
up starting my own firm. After seeing a number healthcare companies across different
of drug and device projects succeed and fail, I points of their life-cycle (from new venture
started to try to apply some of the lessons and companies to mature companies)?
became more deeply involved in helping to
RW: Companies certainly have different
build companies.
challenges at different stages of their life-cycle,
and we have made mistakes at every one of
those stages. And as we gradually build
Spring 2017 eVALUATION Page 19

experience, we get to make different mistakes in reforms can close some of the loopholes and
the future. A couple universal things make the increase transparency and accountability while
journey much easier though, which is finding continuing to incentivize innovation. It is very
great people and great products. important to realize that over the long-term
only innovation can meaningfully lower
eV: How is Healthcare different and unique healthcare costs without forcing people to
from other sectors from an investment accept less care.
eV: What is your view on the current pricing
RW: Roughly two thirds of publicly traded landscape for major pharmaceutical
healthcare companies have no earnings. So, companies and how this could impact
healthcare is unique in that large swaths of the investors?
public markets are comprised of science
experiments as opposed to mature RW: While there are certainly some loopholes in
businesses. To look at these companies, you our system that a few bad managers have taken

Our [healthcare] system is a complicated public private hybrid with opportunity

for misalignment, so hopefully reforms can close some of the loopholes and
increase transparency and accountability while continuing to incentivize
innovation. It is very important to realize that over the long-term only innovation
can meaningfully lower healthcare costs without forcing people to accept less care.

have to be willing to evaluate companies based advantage of, on the whole the vast majority of
upon different scenarios that may exist several people in this industry are doing the good work
years in the future, and be comfortable with of trying to bring new therapies for terrible
binary outcomes. diseases to patients. When it comes to valuing
this kind of innovation, I don't see developed
eV: What's your view on how a Trump countries disagreeing on what cures are
Presidency could potentially change the worth. Reform to close loopholes will hopefully
landscape for investors in the Healthcare prevent future Valeant's from forming while
sector over the next few years? protecting innovation.

RW: I think it is very hard to take away eV: What areas of opportunity do you see
healthcare coverage for large numbers of within the Healthcare sector that you are
people, and don't think doing so meaningfully currently most excited about? What sub-
impacts the issue of rising healthcare costs. So I sectors of the industry do you believe
am hopeful that won't happen. That said, our currently face challenges?
system is a complicated public/private hybrid
with opportunity for misalignment, so hopefully
Spring 2017 eVALUATION Page 20

RW: I think it is underappreciated how rapidly would encourage all students who are
medicine is progressing. For example, the drug interested in medicine to pursue it. And there is
industry is making tremendous strides in the no better place than in America, which despite
war against cancer. I think in this decade new all its faults, has a special healthcare ecosystem
cancer drugs will reduce cancer deaths by that fosters more innovation than anywhere
nearly 25%. We need to make sure scientists else in the world.
and entrepreneurs developing the cures of
tomorrow have the funds they need to bring well as students interested in investing in
these drugs to patients. Healthcare?

RW: I can't think of a better time to be involved

eV: How is healthcare investing different in medicine, whether that is as a scientist,
internationally outside of the U.S. market? entrepreneur, or investor. Our industry has a
What factors do you take into shortage of talent across the board, and so I
consideration? would encourage all students who are
interested in medicine to pursue it. And there is
RW: Innovation is increasingly taking place in no better place than in America, which despite
other countries, but 80% of our work is still all its faults, has a special healthcare ecosystem
right here at home. The US remains really that fosters more innovation than anywhere
special in that it has all the necessary else in the world.
ingredients to support medical innovation from
start to finish. When investing abroad our eV: What are the challenges of managing
requirements are the same, and we try to your own firm? Any advice you can offer
account for differences in ability to attract students and alumni that are interested in
capital and talent. taking a more entrepreneurial path within
the industry?
eV: What advice would you offer students
and alumni interested in building a career in RW: I think one of the really rewarding but hard
the investment management industry as things about starting your own business is you
well as students interested in investing in figure out how to do a lot of things you have
Healthcare? never done before. I think the best advice I can
give is to find mentors/friends who have done it
RW: I can't think of a better time to be involved before, and most importantly to persevere. I
in medicine, whether that is as a scientist, think just surviving when things are hard is a big
entrepreneur, or investor. Our industry has a part of eventually making it.
shortage of talent across the board, and so I
Spring 2017 eVALUATION Page 21

Professor Vasant Dhar

Editor-in-Chief, Big Data Journal
Professor, NYU Stern School of Business
Faculty, NYU Center for Data Science
Founder, SCT Capital Management

Vasant Dhar is a Data Scientist whose research addresses the following

question: when do computers make better decisions than humans? The
research is grounded in Artificial Intelligence, Machine Learning, and data
big and small. The major problem areas addressed in the research are
finance, healthcare, education, business, and sports. In the financial arena,
for example, his major question asks whether you should trust your money
to a robot.

Professor Dhar teaches courses on Trading Strategies, Prediction, Data

Science, and Foundations of FinTech. He also writes on IT-driven
transformation such as the one currently driving education, and
implications for how firms talk to customers and partners and govern data

He has written over 70 research articles, funded by grants from industry and the National Science Foundation. He
pioneered the use of machine learning for predictive modeling on Wall Street across proprietary systematic trading,
risk management, and customer and salesforce management. He is a frequent speaker in academic as well as
industrial forums.

eVALUATION: Can you give us a brief Trusted platforms will probably impact how
overview of Robo-advisor industry? they invest. Thirdly, and perhaps most
importantly, investing even passive investing
Vasant Dhar (VD): The industry is in its early
requires discipline and people can be poor at
stages, but it is growing rapidly, driven by
this relative to machines. For example, keeping
several factors. First, decades of research shows
the risk exposure of a portfolio in line with
that it is very difficult to find good human
objectives involves dealing with gains and
portfolio managers who deliver consistently
losses, changes in volatility, regulation, and
better performance than the standard
benchmark. For example, it is difficult for long
only managers to outperform the S&P500. eV: How does it impact current investment
Second, millennials are on average increasingly management industry and professionals?
receptive to machines making
recommendations and decisions for them.
Spring 2017 eVALUATION Page 22

VD: It partially disintermediates the investment systematic trading strategies in futures and
industry, specifically, the low hanging fruit equities markets. I hitched myself to the
involving portfolio optimization and Machine Learning post in the mid-90s and took
rebalancing. It also raises the bar for investment a few years off from academia to explore the use
professionals in general. Everyone needs to of machine learning in systematic investing. Ive
work harder and look for creative ways to add been doing it ever since. My students start by
value. building some of the most common used
strategies in use by investment professionals,
At the same time, it also opens up opportunities
and explore the properties of such strategies. I
for participation for larger numbers of
then ask students to consider these standard
investors, and creation of new products and
strategies as benchmarks that they should
compare themselves to, using newer sources of
eV: How does it add value to institutional data and algorithms. Students come away with
and individual investors? an understanding of the basics of systematic
investing and the language of the domain. The
VD: At the moment, robo advising is not much knowledge is useful if they want to be traders,
more than portfolio optimization. It is great for salespeople, researchers, investors, risk
passive investors who want to, say, track an managers, or technologists.

This space is a little like being a kid in a candy store and is evolving quickly. Theres
a lot of opportunity, but remember, there will be lots of failures, so proceed with
caution. But its a great space for people not only interested in financial services
and technology, but in understanding how FinTech will impact business and
index. It outsources the grunt work around data, eV: Can you tell us more about the new
analytics, and reporting for a small fee of FinTech specialization at Stern? (How was
keeping portfolios balanced and in line with the new specialization created? What
user objectives. classes are available? Who should consider
getting this specialization?)
In the future, it is likely that robo advising will
move up the value chain, becoming intelligent, VD: The FinTech specialization at Stern is a
where machines will increasingly engage in partnership between our Finance and
making recommendations in addition to Computing people to provide students with a
portfolio optimization and compliance. foundation in an area where technology is
central to business models and central to value
eV: Can you give us a brief overview of the
creation. We define FinTech as
Robo-advisor class you are teaching?
Financial sector innovations involving
VD: My class, Robo Advisors and Systematic
technology-enabled business models that can
Trading, is about how to think about systematic
facilitate disintermediation; revolutionize how
investing. The class is based on my professional
existing firms create and deliver products and
experience over the last 25 years in designing
Spring 2017 eVALUATION Page 23

services; address privacy, regulatory and law-

enforcement challenges; provide new gateways
for entrepreneurship; and seed opportunities for
inclusive growth.

Broadly speaking this space covers institutional

and consumer finance including trading,
lending, security and privacy, Regtech, and
other areas involving disintermediation and
value creation. We have introduced a
Foundations of FinTech course in Fall 2017 to
kick off the specialization. We have a number of
electives, such as mine and several others in
consumer finance, payments, risk management,
and entrepreneurship that provide more depth
in the areas covered in the foundations course.

eV: Do you have any general advice for

students who are interested in joining the
FinTech industry?

VD: Be focused. This space is a little like being a

kid in a candy store and is evolving quickly.
Theres a lot of opportunity, but remember,
there will be lots of failures, so proceed with
caution. Its a great space for people not only
interested in financial services and technology,
but in understanding how FinTech will impact
business and society.
Spring 2017 eVALUATION Page 24

Student Stock Pitches

A team of four full-time first-year MBA students at NYU Stern won Sterns S&P
Stock Pitch Competition on May 6th through pitching long American Railcar
Industries (ARII). A summary of their pitch can be found below.

Kevin Greenhalgh (

William Li (
Joe Martoglio (
Patrick Merrill (

American Railcar Industries, Inc (BUY) Undervalued & Set to Benefit from Cyclical Recovery

Prepared on May 16, 2017

By Kevin Greenhalgh, William Li, Joseph
Martoglio, and Patrick Merrill

Stock Overview
Ticker: ARII 52 WK Range: 35.43-51.10 EPS (2016): $3.74
Current Price: $37.43 Enterprise Value: $1.1 Billion 12 Month Target Price: $52.50
Exchange: NASDAQ Market Cap: $715 Million Upside to Target Price: 40%

Business Description: American Railcar Industries operates in three segments: manufacturing, railcar leasing,
and railcar services. The manufacturing segment primarily manufactures hopper and tank rail cars and railcar
components for other companies and ARIIs own lease fleet. The railcar leasing segment leases railcars
manufactured by the company to third parties. The railcar services segment provides railcar repair and
engineering and field services. The company is based and manufacturers railcars in the United States.


72,561 36,400 Manufacturing: Cyclical
116,714 business. Revenue and gross
67,572 43,839
65,108 116,714 profit declined with industry
77,114 35,382
65,108 challenges

700,061 119,957 Railcar Leasing: Revenue and

144,779 160,925 gross profit increased as company
69,019 expanded lease fleet
Railcar Services: Consistent
2014 2015 2016 2014 2015 2016
Manufacturing Railcar Leasing Railcar Services
Manufacturing Railcar Leasing Railcar Services
revenue and gross profit

Leading indicators show recovery in railcar manufacturing demand

Purchases of new railcars significantly declined in 2016 and 2017 from lower rail traffic and uncertainty. Stable oil
prices and decreased fear of coal regulation is likely to encourage investment in railcars. In Q1 conference call, ARII
mentioned an increase in inquires. Leading indicators reinforce the recovery:
Spring 2017 eVALUATION Page 25

Leading indicator - Rail velocity: Decrease in Leading indicator - Carloads by year:

train velocity means more railcars are needed to Increase in carloads means existing railcars
move the same amount of product are being used and railcar owner are more
likely to purchase new cars

Carloads (in thousand)

Rail Velocity
(Y/y chg)

**Source Association of American Railroads** Week

Leasing segment is highly valuable and growing

Leasing is high margin, less cyclical, and has been fast growing in the past few years, and the stock price does not
fully reflect its value. This segment mitigates cyclical changes in manufacturing demand through providing a steady
stream of earnings, and manufactured cars can be added to the lease fleet if outside demand is weak.

Leasing revenue has doubled since 2014. The company has expanded its lease fleet to 11,869 railcars currently
from approximately 2,000 in 2012. The fleet will continue to grow, and 1,199 cars in the manufacturing backlog are
expected to be added to the fleet.

American Railcar Leasing, another company which was wholly owned by Carl Icahn, was recently sold to Sumitomo
Mitsui Banking Corporation for $2.79 billion or approximately $96,000 per railcar. Applying a similar valuation to
ARIIs lease fleet leads to a valuation of $1.15 billion for just the leasing segment. This is greater than ARIIs
enterprise value for the entire business, currently $1.13 billion. The $1.15 billion valuation represents 9.6 times
2016 gross profit for the leasing segment, a similar valuation as other companies providing railcar leasing.

ARIIs lease fleet is composed of young railcars and similar railcars as ARL since ARII manufactured railcars for both
companies. In conclusion, this segment will provide significant returns to shareholders whether it becomes an
acquisition target or is held and continues to provide stable cash flows ARII.

Significant capital return to shareholders supported by cash flow

ARII currently has 66% of a $250 million share repurchase program outstanding which would retire 23% of shares
outstanding. It also provides a 4.28% dividend yield (approximately $30 million/year). Carl Icahn owns a 62%
majority stake and is likely to require continued shareholder friendly policies leading to significant return for

ARII can easily afford returning cash to shareholders. Operating cash flow for 2016 was $180 million (greater than
25% of market cap), the current ratio is 3.58, and the interest coverage ratio is 4.96. The company also has $151
million in cash and cash equivalents and 77.5% of debt is due in 5 years or greater.
Spring 2017 eVALUATION Page 26

Relative Valuation

*Source - Capital IQ**


Sum of the parts relative valuation: Applying average multiples for enterprise value to EBIT for railcar leasing
and railcar manufacturing companies yields a $2 billion enterprise value (Leasing - $1.2 billion + Manufacturing
and Services - $0.8 billion) for ARII. This represents 64% upside or $61/share.

Discounted Cash Flow Valuation

Valuation: $52.50/share (40% upside)
Model Assumptions:

Consistent market share for manufacturing

FTR delivery projections for market size
Backlog absorbed into lease fleet then fleet grows
with inflation
Margins decrease in short-term then long-term go to
past three-year average

Sensitivity Analysis to Growth Rate and WACC

Significant debt load gives exposure to rising interest rates
Sustained slow crude market may reduce demand for frac sand transport and cause sustained oversupply
and soft demand for railcars
Majority stakeholder (Carl Icahn) may significantly affect stock price through a decision to sell
Political risk through possible increased regulation or less than expected infrastructure spending
Spring 2017 eVALUATION Page 27

Abhinav is a first-year MBA student at NYU Stern School of Business. He also works part-time for
Telsey Advisory Group, an equity research firm focused on the consumer and retail industries.
Prior to Stern, Abhinav traded interest rates and currency derivatives for a proprietary asset
manager specializing in macro based strategies. He holds a bachelor's degree in electrical
engineering and has worked for Deloitte Consulting before MBA.

Abhinav Sharma (

Stock: Lending Club (NYSE: LC)

If you take an unsecured loan from the bank to make a major purchase or refinance your credit card balance you
can expect to pay over 20% in interest. If on the other hand, you have spare cash and deposit it in the bank you get
paid an interest rate of less than 1%. Lending Club manages to cut this spread in half while using technology to
eliminate human error and wait time from the process.

Value Creation

Lending Club is a technology powered connector of lenders and borrowers. LC reduces the cost of credit for small
business owners and retail borrowers. Investors use Lending Club to earn attractive risk-adjusted returns from an
asset class that has generally been closed to many investors and only available on a limited basis to large
institutional investors. LCs proprietary technology automates key aspects of the loan process including the
borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing,
regulatory compliance, and fraud detection. Their platform offers sophisticated analytical tools and data to enable
investors to make informed decisions and assess their portfolios. They generate revenue by charging an origination
fee from borrowers, a servicing fees from investors for matching available loan requirements with capital, and
management fees from investment funds and other managed accounts.


LC currently offers Personal, Education, Patient finance, Auto Refinancing, Small Business loans and lines of credit.
Each borrower is assigned one of 35 loan grades, from A1 through G5, based on loan amount, maturity period, FICO
score, debt to income ratios, three years of credit history review, and several credit inquiries. Interest terms are set
based on loan grades. Once approved the securitized loan is made available to investors via the marketplace.

Investors can invest in a wide range of loans based on term and credit characteristics. Some loan categories like
small business loans are offered to private investors only and are not made available in the market place. Typical
loan size and maturity period varies widely with the category of loan. All investors are provided with a borrowers
proprietary credit grade and access to credit profile data on each approved loan as well as access to data on each
listed loan and all the historical performance data for nearly every loan ever invested in through LCs marketplace.
LCs investors can broadly be classified into retail, HNI, banks, and institutional.

LC currently facilitates loans in 26 states, with plans to expand nationally in 2017.

Rise and Fall

LC was founded in 2006 by Renaud Laplanche and their loans were declared tradeable in 2008. Demand for credit
always overwhelmed credit availability. Investors kept pouring in year after year once happy with their due
diligence and in 2012 LC turned Operational Cash Flow positive. Their marquee moment came in 2013 when the
banks, whose market LC was trying to hijack, themselves decided to invest
Spring 2017 eVALUATION Page 28

in LC loans after a long drawn due diligence process was completed. Their algorithm had passed credit worthiness
and the disruption was now complete. In December 2014, LC went public in the biggest Technology IPO in history.
Within a week share price doubled and the market valued LC at $10.88B a mere eight years after its inception! Three
reasons why the street loved LC technology replaced the traditional 20-minute loan interview, cheaper & scalable,
and the TAM was huge $500B +. Disruption!!

Loan origination grew by 82% in 2015 with $8.4B worth of loans originated through the year. In early 2016, there
were allegations that $3MM worth of loans passed onto investors had their dates altered during the vetting process.
Investigations into the issue uncovered that a further $22M worth of loans passed onto a large bank did not meet
LCs credit criteria. Further scrutiny into LCs activities led to two rumors. One that the CEO Renaud Laplanche had
financial links to a fund that LC had been preparing to acquire. Second, that the CEO and his family took out 32 loans,
during LCs early stages, totaling $72,000 to inflate books and attract funding. On May 09 th 2016, the board of
directors found both the rumors to be true and fired CEO Renaud Laplanche. Ex CFO and CMO Scott Sanborn was
asked to take over. The stock tanked and at the lowest point LC was valued at $1.31B down from $10.8B in 16

Judging the Recovery

Valuing LC is like pricing Oil. Demand might vary but supply determines prices. LCs growth can be tracked by
studying their lenders. Good news for LC is that they have been able to bring back loan origination numbers to pre-
scandal level and thus protecting their top line revenue. But this has come at the cost of better terms to investors
and promotional offers and hence hit their bottom line.

To understand and predict recovery, I broke down quarterly origination by investment source. I could find most of
the data from their gigantic excel sheet of loans. The rest I estimated by talking with someone at investor relations.
I broke down 2Q16 into two periods before and after dooms day. I extrapolated both into quarterly numbers for



Institutional Banks Managed HNI Self Managed

Clearly, Banks take time with their due diligence, but once they come onboard (3Q13), they run the show. Crisis did
not much affect managed accounts. These were probably enticed by the discounts offered into buying even more
loans in the last two quarters. Retail investments might have peaked already. They would probably not have offered
much better numbers even if the crisis hadnt happened. Bank funding fell from 34% in first-quarter 2016 to 13%
in third-quarter 2016 following the scandal, but rebounded to 31% in the fourth quarter; and while bank purchase
volume is still below peak levels, it is close to 2015 levels. It seems like the
Spring 2017 eVALUATION Page 29

initial circle is repeating itself with banks taking longer to complete due diligence process but once they do, they
will lead the numbers. Moreover, the return of bank origination numbers cannot be attributed to a 100-bps discount
offered by LC but has to be based on credit worthiness of the underlying loans.

Given that LC could originate $8.665B in loans in a scandal hit 2016 (vs $8.362B in 2015), I expect them to hit their
2017 target of $9.3B in loan origination after completing the tapering of investor discounts in place since 3Q16.


With negative earnings, fast changing margins, and no comps, a highly assumptious DCF gives me a value of $12 per
share (vs current market price of $5.4). Alternatively, historic multiples of revenue and loan originations can be
compared including during private fund-raising period.

I would value Lending Club as a sum of three parts Net Assets, Proprietary Algorithm, and Data. LC has liquefiable
assets of ~$5.5B and total liabilities of ~$4.6B. With a market cap of ~$2.1B and net liquidation value of ~$0.9B,
the market is pricing LCs algorithm and data at $1.2B. This is the same algorithm that price at over $10B in the
December of 2014. Goldman Sachs and Suntrust are trying to enter the P2P lending business. How much premium
over the $0.9B Liquidation Value would they be willing to pay for LCs tried and tested algorithm that was worth
$10B two years ago, instead of starting from scratch? Moreover, LC maintains a comprehensive data set of every
loan application they receive. There is substantial amount of consumer insights in the data which gives LC an edge
over any new entrants and can be used to generate other revenue streams.

Corporate Governance?

After the scandal, there is a new CEO, new CFO, new Chief Capital officer, a completely revamped board of directors,
and new personnel is most managerial roles. LCs reaction to the scandal buying back loans that didnt match
criteria, internally investigating all previous loans and completely co-operating with external investigations,
owning up to the allegations of CEOs family buying false loans go a long way in indicating that the change of guard
is real. Moreover the scandal was minute is $ values, exclusively participated in by the now departed CEO and was
only unearthed because of intensive internal investigations without any external pressure. Given the openness in
which the new administration has handled business and resurgence in loan origination numbers, current prices are
a typical distress over-reaction bound to correct in due course of time.
Spring 2017 eVALUATION Page 30

SIMR Recent Events (Spring 2017)

Breakfast with Atalaya Capital Management

On Wednesday February 15th a group of Stern students visited Atalaya Capital Management to meet with Stern
alum, David Aidi, as part of NYU Sterns Office of Career Development Industry Insights breakfast series.

Atalaya Capital Management is a privately held, SEC-registered, alternative investment advisory firm that was
founded in 2006 and is focused on making opportunistic credit and special situations investments. Atalaya manages
and deploys capital in private equity format funds and has invested over $2BN across two channels: opportunistic
purchases of loans and credit assets, and proprietary credit originations and financings. Atalaya has three principal
investment strategies: real estate, corporate and specialty finance assets. Atalayas real estate business
predominantly invests in U.S. commercial real estate, and this has spanned a wide range of real estate assets. Some
examples Mr. Aidi provided included condominium/residential real estate financing in New York City and
commercial office financing in the greater New York area. In the corporate arena Atalaya pursues opportunities
globally in the middle market and lower middle market borrowing space across a variety of industries and financing
structures. Lastly, regarding Specialty Finance Atalaya opportunistically originates asset based loans globally across
consumer and commercial market niches.

Mr. Aidi earned a B.S. in Business Administration, summa cum laude, from NYU Stern and is a current member of
the NYU Young Alumni Leadership Council. David is currently a Partner at Atalaya. He began his career at Merrill
Lynch, holding positions within the High Yield Capital Markets group and TMT investment banking. His past
experience includes holding a Portfolio Manager role in charge of Direct Lending at Magnetar Capital, LLC, and
working as a corporate analyst at Highbridge/Zwirn, focused on private lending and special opportunities

Students engaged with David over a fascinating discussion about his career in the financial industry, the firm, and
the emergence of Private Credit as an asset class. We learned about Atalayas income and special opportunities
strategies and discussed the state of lending and real estate in the U.S. in the years following the financial crisis as
well as the firms view on how rising rates could impact private credit investors and the current state of the
investment management industry.

We would like to sincerely thank David Aidi and Atalaya for hosting us!

Activist Investing Fireside Chat with Jeff Gramm and Andy Shpiz

On February 28th, Jeff Gramm and Andy Shpiz visited Stern to discuss activist investing and Jeffs new book Dear
Chairman which explores Boardroom Battles & Shareholder Activism as well as conflicts of interest among public
companies and shareholders. Students also asked questions about the hedge fund industry, careers in investment
management, and the future of activist investing.

Jeff Gramm manages Bandera Partners, a value-oriented hedge fund based in New York City. He has taught Applied
Value Investing at Columbia Business school since 2011. He received his MBA from Columbia Business School in
2003 and graduated from the University of Chicago in 1996.

Andy Shpiz is a Managing Director at Abax Global Capital and has previously worked at Allen & Company and
Fidelity. He received his MBA at NYU Stern in 1996 and graduated from Colby College in 1991.
Spring 2017 eVALUATION Page 31

Breakfast with OppenheimerFunds

On March 28th, OppenheimerFunds hosted a breakfast for NYU Stern MBA students with alumni Rocco Benedetto,
Senior Vice President Head of Broker/ Dealer channel at OppenheimerFunds and Ben Rockmuller, Senior Portfolio
Manager at OppenheimerFunds. The breakfast provided an opportunity for Stern students to understand the
operations of OppenheimerFunds and current trends in the investment management industry. After a summary of
Oppenheimer's fund distributions and set up, students discussed with the representatives the top challenge faced
by the asset management industry. Passive investing's popularity was the dominating theme among technology,
robo investing, algorithms. Students further discussed active vs passive investing with Rocco and Ben and how
active investing shall come back and that passive cannot dominate in the long run.

We thank Rocco and Ben for hosting us and look forward to our continued partnership.

Lecture with Professors Altman and Kovensky on Corporate Bankruptcy and Reorganization

On April 19th, SIMR, along with Graduate Finance Association and Stern Private Equity Club, hosted a special lecture
by Professor Edward Altman and Professor Stuart Kovensky about Corporate Bankruptcy and Reorganization. The
purpose of the session was to introduce students to the subject matter of the Corporate Bankruptcy class as well as
to inform students of the career opportunities in Distressed Investing and Turnaround Consulting. The session
focused on what happens when even the best laid business plans dont work out. What if a company borrows too
much, business conditions change, and/or they are faced with a large legal judgment. What happens when things
dont work out and companies must file for bankruptcy in order to reduce their debt and possibly restructure
their operations. Professors discussed how the mentioned course would introduce students to the US Bankruptcy
Code, the market for non-investment grade debt, the bankruptcy reorganization process, and a few examples of
interesting corporate bankruptcies.

Alumni Mixer

On March 30th, SIMR organized its annual alumni mixer at House of Brews to help connect current students with
alumni in the industry. Students and alumni discussed their business school experiences and trends in investment
management, research, and financial services industries.
Spring 2017 eVALUATION Page 32


Our mission is two-fold, (1) to broadly spread awareness of research and investing to interested parties and (2) to
foster a greater connection between NYU students and alumni in the investment community. On that front, if you
would like to get involved, or provide us with feedback, please dont hesitate to reach out. If you would like to be
added to our newsletters e-distribution list, please send us your contact information. Thanks for reading!
Visit our student club affiliation, Stern Investment Management & Research Society, on the web:
Connect with SIMR students/alums on LinkedIn!
Stern Investment Management & Research Society (SIMR) Alumni

Spring 2017 Editors

Diana is a part-time MBA student in NYU Sterns Langone program and an Equity Research
Analyst with Franklin Templeton Investments in New York, covering mid-to-large cap Technology
companies. Diana holds a Bachelors degree in Economics & English from Vanderbilt University
and is a CFA charterholder.

Dianas contributions to the eVALUATION newsletter are based on her own personal opinions,
and are not endorsed by Franklin Templeton Investments nor represent FTI information or
Diana Keenan (

Devesh is a first-year MBA student at NYU Stern School of Business. Prior to Stern, Devesh
worked at Netscribes, a research and advisory firm, where as Assistant Manager of the
Investment Research team, he led investment valuation, equity research, market research, and
transaction advisory projects. He has also written numerous articles for issuing
recommendations for US stocks. Devesh started his career at S&P Capital IQ, where he conducted
business research and financial analysis of companies across geographies and industries. Devesh
completed his Bachelors degree in Business Studies with specialization in Finance from
University of Delhi. He is also a CFA charter-holder.
Devesh Kumar (

Joe is a first-year MBA student at NYU Stern. Prior to Stern, he worked as a Quality Engineer
and Quality Site Lead for Chevron overseeing fabrication of oil and gas production equipment.
Joe earned a bachelors degree in Mechanical Engineering from University of Michigan.

Joe Martoglio (

Wei is a first-year MBA student at NYU Stern. Prior to Stern she worked as a senior consultant
for financial services industry at Ernst and Young. She started her career at Deutsche Bank in
the prime brokerage and sales technology teams. She earned a bachelors degree in
information systems with a minor in computer science from University of Wisconsin
Madison. She has passed all levels of the CFA exams.

Wei Wen (